Q1 2023 Flowserve Corporation Earnings Call
Speaker 1: i't.
Speaker 2: Please stand by. We're about to begin.
Speaker 2: Good day everyone and welcome to the Q1 2023 Slow Serve Corporation Earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Jay Ruch, Vice President of Investor Relations and Treasurer. Please go ahead sir.
Speaker 3: Thank you, Levett, and good morning, everyone.
Speaker 3: We appreciate you joining our call today to discuss float service first quarter 2023 financial results Groves.
Speaker 3: On the call with me today are Scott Rowe, Flow
Speaker 3: Following our prepared comments, we will open the call for questions. As a reminder, this event is being webcast and an audio replay will be available.
Speaker 3: Please note that our earnings materials due, and this call will, include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations, and other information available to management as of May 2nd, 2023, and they involve risks and uncertainties.
Speaker 3: many of which are beyond the company's control. We encourage you to review our safe harbor disclosures, as well as our reconciliation of non-GAAP measures to our reported results, both of which are included in our press release and our news presentation and are accessible on our website in the investor relations section. I would now like to turn the caller to Scott Rowe, Flow Services President and Chief Executive Officer, for his prepared comments.
Speaker 4: Thanks Jay and good morning everyone. Thank you for joining FOSER's first quarter earnings call. I am pleased to report strong results for the first quarter which provide us with a very solid start to the year. First quarter adjusted EPS came in at 40 cents supported by year-over-year revenue growth of nearly 20%. Thanks to the efforts of our associates across the company, we continue to build on the positive momentum created in the 2022 fourth quarter.
Speaker 4: driving further operational improvements while performing for our customers. The first quarter has historically been our most seasonally impacted period in any given year, but we have taken action to moderate this trend and drive more consistency in our results. Our first quarter performance was a great start in this effort.
Speaker 4: In the fall of last year, we challenged the team to not only deliver a strong finish to 2022, but also to ensure that we are maximizing our opportunities to begin the year strong.
Speaker 4: The team's efforts paid off as both segments delivered outstanding results, exceeding their revenue, margin, and bookings commitments.
Speaker 4: The first quarter results have us well positioned relative to our previously announced full year guidance and provide a solid foundation to build upon throughout the year.
Speaker 4: We remain optimistic about our end markets and are encouraged by the growth and value creation opportunities ahead of us.
Speaker 4: I am increasingly confident that FlowServe is well positioned for 2023 and beyond, and I believe we are differentiated from many others in the industrial landscape.
Speaker 4: Our end markets remain healthy, and we've secured solid bookings above a billion dollars for the fifth consecutive quarter. In fact, our project funnel is now at its highest level since 2019, including projects across all industries.
Speaker 4: driven primarily by two key catalysts.
Speaker 4: First, there is an increase focused on energy security around the globe, which is driving heightened levels of activity.
Speaker 4: For example, we are seeing significant investment in nuclear, LNG, fossil power plants, and regional oil and gas developments.
Speaker 4: as countries look to become less dependent on unreliable foreign suppliers of energy.
Speaker 4: Today, our nuclear and LNG project funnels are up significantly from where they were a year ago. The second primary driver of our expected growth is decarbonization. We believe spending in this area will continue to expand through 2023 and accelerate beyond this year as our customers look to meet their ESG commitments and comply with regulatory changes.
Speaker 4: This investment is supported further by various government incentives, including the Inflation Reduction Act in the United States.
Speaker 4: Our project funnel and decarbonization doubled in 2022 and has risen nearly 25% since the beginning of the year and now includes activities like hydrogen, carbon capture, sustainable energy like wind and solar, as well as projects to decarbonize existing infrastructure.
Speaker 4: BOSERV is truly at the intersection of energy security and energy transition. These two major global themes leverage both our traditional in-market and our 3D strategy of diversification, decarbonization, and digitization.
Speaker 4: This backdrop, combined with Full Service late cycle exposure and the direction of our customers' capital spending, support our expectations for continued positive order momentum in 2023.
Speaker 4: Additionally, we have taken significant actions over the last year to drive further operational improvements to better execute in the current environment.
Speaker 4: We have focused on accountability, streamlined decision making, and improved processes across our manufacturing platforms and supply chain functions.
Speaker 4: We believe the combination of the supportive market environment with improved operational execution will enable us to continue to build on the momentum of stronger operating results as seen in these last two quarters.
Speaker 4: Closer delivered revenues of nearly $1 billion this quarter, our highest first quarter sales level since 2015.
Speaker 4: We leveraged this top-line growth to deliver adjusted gross margins of over 30%, an important hurdle for flow service progression towards price costs and absorption improvement. Additionally, we produced incremental adjusted operating margins of 34% in the quarter.
Speaker 4: Notwithstanding our strong revenue performance, our first quarter book to bill was 1.08 and drove a sequential increase in our backlog, which now sits at $2.8 billion.
Speaker 4: This solid foundation, the strongest since 2014, positions Flowserv for expected revenue growth in the remainder of 2023 and 2024. Finally, we expect margins in our backlog to further increase as we replace lower margin project work that was booked primarily in 2021 with higher margin business we are winning today.
Speaker 4: We should also benefit from the impact of our January 1st price increase in future periods as it works its way through the system.
Speaker 4: Let me now provide some additional color on our first quarter orders.
Speaker 4: supported by strong growth in FCD and our SEALs business across all geographies. Many of our customers have been running their assets at high utilization rates over the past year, which requires ongoing maintenance spending to ensure their facilities remain operational and productive. We expect to see solid activity in this space, including turnarounds, general maintenance, and efficiency-focused upgrades throughout 2023, and at this point, we see no signs of it slowing down. This quarter's largest project bookings included three mid-sized projects, including the first project,
Speaker 4: 32% and 4% respectively.
Speaker 4: Due to the tough compare of last year's first quarter large project cookings,
Speaker 4: which included a $55 million nuclear award.
Speaker 4: We are in the second year of what we continue to believe is a multi-year upcycle. We fully anticipate delivering bookings this year at a similar level to 2022 with the potential for additional growth.
Speaker 4: This comes despite the headwind of the large $220 million Jafura project that we booked last year.
Speaker 4: Later cycle project investment, increased EPC backlogs, and continued MRO and aftermarket growth are expected to drive our full year book-to-bill over 1.0 again this year, resulting in increased backlog that should position closer for further revenue growth in 2024.
Speaker 4: in supporting our traditional customers. Energy security is critical in the near term, and we believe the 3D strategy is well aligned with the expected energy transition and decarbonization investments of tomorrow, creating visibility to long-term growth. With that overview, let me now turn the call over to Amy to address our first quarter financial results and our expectations for the remainder of 2023 in greater detail. Amy? Thanks, Scott, and good morning, everyone. Looking at Flowserve's first quarter financial results in greater detail, we are pleased that both segments succeeded our prior expectations for the period.
Speaker 2: which represented 45% of the quarter's revenue and over 60% of the first quarter's adjusted operating income.
Speaker 2: On a reported basis, our earnings per share for the quarter was 20 cents, primarily impacted by realignment and FX charges totaling 15 cents. Boulain acquisition costs and discrete non-cash asset write-downs accounted for the balance. First quarter revenue increased over 22% year-over-year on a constant currency basis, with both OE and aftermarket revenues increasing over 20% versus prior year.
Speaker 2: Revenue increased across the globe on a year-over-year basis with notable strength in the Middle East and Africa region, as well as in Latin America where sales were up 58% and 37% respectively, while all other regions were up in the mid to high teens. Shifting now to margins where we delivered solid improvement, adjusted gross margin and increased 370 basis points to 30.4%, including FPD's 310 and FCD's 410 basis point increases. Benefits from our enhanced volume leverage.
Speaker 2: Last year's pricing increases and an improving supply chain environment were partially offset by the recognition of lingering lower margin backlog that was booked in 2021, as well as increased compensation expense based on our strong year-over-year performance.
Speaker 2: We are pleased to have delivered 30% plus gross margins earlier in the year than we had originally anticipated and our actions and initiatives are designed to maintain and improve this level of gross margin performance. On a reported basis, first quarter gross margins increased 480 basis points to 30.3% where in addition to the items mentioned previously, the 2022 first quarter included $10 million of Russian-related exit charges and gross margins.
Speaker 2: On a reported basis, first quarter SG&A increased $38 million to $244 million, or 24.9% of sales.
Speaker 2: In addition to the items mentioned previously, the quarter also included realignment charges of $16.7 million, $3.1 million of costs related to the Boulogne acquisition, and $2.9 million for the non-cash write-down of a discrete asset.
Speaker 2: Partially offsetting those items is $10.2 million of SG&A expense that was also related to our exit from Russia last year, which did not recur in 2023.
Speaker 2: Our first quarter adjusted operating margin increased 500 basis points to 8.3%, driving a solid incremental adjusted margin of 34%.
Speaker 2: Both FPD and FPD contributed to the improvement with 540 and 380 basis point increases respectively. The first quarter reported operating margin increased 490 basis points year over year to 5.8%.
Speaker 2: where significant operating leverage was partially offset by the $4 million increase in adjusted items versus prior year, and FX headwinds of roughly $7 million.
Speaker 2: Our strong start to the year has Flowserve well positioned for further success in 2023.
Speaker 2: Our first quarter tax rate of 15.2% was lower than expected, primarily due to the execution of certain tax strategies.
Speaker 2: We continue to expect a full year adjusted tax rate in the 18-20% range.
Speaker 2: Turning to cash flows, we are pleased to return to generating cash in the Seasonalink Challenge first quarter, where we delivered operating cash flow of $27 million versus last year's use of $27 million. The improvement is primarily due to increased earnings and the $31 million reduction in cash.
Speaker 2: used for working capital compared to last year. As a result, 2023 was one of the few times in the last 20 years where CloseServe generated positive free cash flow during the first quarter. And this occurrence is even more rare during the first quarter when the company is in growth mode like we are today. While we delivered strong collections on our accounts receivable,
Speaker 2: This achievement is less transparent in our financials due to the substantial shipments in revenue in the last month of the quarter. We will continue to focus on improving our cash conversion cycle, which is challenged by our growing backlog and improving but still elevated lead times due to lingering challenges in the supply chain. Additionally, we will continue to focus on improving our cash conversion cycle.
Speaker 2: our previously mentioned strong March revenues contributed to accounts receivable CAF's use of $26 million. From an inventory perspective, we delivered an improvement versus the prior year, where inventory, including contract assets and liabilities for the first quarter, was the use of $34 million.
Speaker 2: versus the prior year use of $52 million. As a percent of sales, primary working capital ticked up a modest 40 basis points to 32.8%, supporting our continued solid bookings and sequential backlog growth.
Speaker 2: While our backlog increased over 25% since this time last year, our inventory, including contract assets and liabilities as a percent of backlog, dropped 290 basis points to 29.3%. As our supply chain continues to improve and as we further enhance the inconsistency and predictability in our operating performance.
Speaker 2: we believe the opportunity exists to reduce working capital investment to a level below 30% of sales. In addition to working capital, other significant uses of our cash in the first quarter included $26 million in dividends, $15 million in capital expenditures,
Speaker 2: and a $10 million term loan debt reduction. Turning to our outlook for the remainder of the year, we expect to continue our recent operating momentum, capitalizing on supportive end markets and delivering sequential adjusted operating margins and EPS improvement through the year. Additionally, we remain committed to the $50 million cost reduction plan for the remainder of the year.
Speaker 2: billion dollars, we now expect to deliver revenue growth in the 10 to 12 percent range including a modest currency benefit given the weakening of the US dollar since the year began.
Speaker 2: We also increased our full year 2023 adjusted EPS to the $1.65 to $1.85 range, which incorporates the first quarter outperformance and would represent a year-over-year adjusted EPS increase of 59% at the midpoint.
Speaker 2: As we highlighted last quarter, we expect to ship roughly 80% of the $2.7 billion backlog we began the year with.
Speaker 2: We typically ship roughly 90% of our beginning backlog in any given year. However, due to the return of large project awards and last year's significant increase in OE bookings, coupled with ongoing issues with an extended supply chain, our quoted lead times remain elevated.
Speaker 2: Of further note, our revenue and adjusted EPS ranges do not include any impact from the expected acquisition of Elan, which we now expect to close in the third quarter, as we continue to work through regulatory approvals primarily in Europe .
Speaker 2: Our targets also exclude anticipated realignment expenses of approximately $25 million, as well as potential items that may occur during the year, such as below-the-line foreign currency effects and the impact of other discrete items, such as acquisitions, divestitures, special initiatives, tax reform laws, etc.
Speaker 2: Excluding the expected realignment spending and other first quarter adjustments, we have reaffirmed our reported EPS range of $1.40 to $1.65.
Speaker 2: Both the reported and adjusted EPS target range also assume current foreign currency rates, reasonably stable commodity prices, no significant geopolitical disruptions, and expectations for the end market environment to remain supportive at levels similar to 2022. We also continue to expect net interest expense in the range of 55 to 60 percent.
Speaker 2: to anticipate our traditional strong fourth quarter performance with both elevated revenues and earnings.
Speaker 2: In summary, we believe our full year guidance is balanced. Our updated range reflects the positive momentum we have created over the last two quarters, but incorporates some of the uncertainties that still exist in the current environment.
Speaker 4: Most importantly, we believe that Flowcert is on the right track and we're confident in our ability to execute within that enhanced guidance range. Let me now return the call to Scott. Great, thank you Amy. I'd like to provide a brief update on the VLAN transaction. Our integration planning efforts with the VLAN are progressing well.
Speaker 4: The more we interact with VELON's associates and sites, our confidence only increases that this is the right acquisition for FlowServ to create substantial shareholder value. We are eager to begin the integration of the VELON associates, products, and sites in the FlowServ.
Speaker 4: We are meeting many committed and talented associates around the world with a passion for providing solutions into challenging applications like nuclear, defense, and severe service. We continue to believe significant opportunities exist with the combined portfolio and we remain fully committed to delivering at least $20 million of annualized cost synergies to the
Speaker 4: to be achieved by the end of year one.
Speaker 4: Additionally, we expect the transaction to be accretive to our adjusted EPS in the first full year following close.
Speaker 4: While we are making significant progress with the regulatory approvals, there are certain agencies in Europe that are taking longer than our original expectations, and we now believe that we will close the transaction in the third quarter versus our prior expectation of closing late in the second quarter.
Speaker 4: Turning to our 3D strategy.
Speaker 4: As we enter the second year focusing on diversification, decarbonization, and digitization.
Speaker 4: We are encouraged by the higher growth rates we have experienced in the 3D targeted markets.
Speaker 4: encouraged by the higher growth rates we have experienced in the 3D targeted markets, and we fully expect that trend to continue.
Speaker 4: We remain committed to diversifying our portfolio with new technology and products, while substantially capitalizing on the decarbonization initiatives around the world.
Speaker 4: These include significant opportunities in hydrogen, CCUS, recyclables, and partnering with our existing customers with our energy advantage offering.
Speaker 4: to increase the efficiency of their operations, reduce their energy usage, and lower their carbon footprint. The first quarter again produced solid 3D bookings.
Speaker 4: Let me now highlight some of our indicative 3D wins, starting with the diversify pillar.
Speaker 4: We are rapidly expanding our dry gas fuel offering for all gas applications including hydrogen.
Speaker 4: where our differentiated sealing technology works extremely well in this stringent application. In a recent example, FlowServe's dry gas seals were chosen for an Eastern European Facility Expansion and Modernization Project.
Speaker 4: In an effort to support hydrogen compression, our seals enable the customer to meet strict environmental standards while improving their overall operability and uptime.
Speaker 4: Shifting to decarbonize.
Speaker 4: WOSF is supplying pumps, valves, and seals for the world's first large-scale direct air carbon capture project based in Texas. Following the project's expected completion in 2025, the facility will be the largest of its kind and capture up to 500,000 metric tons of CO2 annually.
Speaker 4: Once the pilot plant is operational and proves that this concept can have a significant impact on the environment, we expect this technology to be leveraged globally.
Speaker 4: Finally, on Digitize, we continue to make progress deploying Red Raven, our IoT offering.
Speaker 4: where we are instrumenting and monitoring our installed base with customers around the world to provide predictive analytics and improve data for their assets. Entering its third year of commercialization, we are now receiving contract renewals for monitoring and prediction services.
Speaker 4: which demonstrates that we are creating value for our customers by enhancing their ability to avoid downtime and drive overall productivity of their assets. We were pleased to receive renewal contracts from four power plants in the U.S. And even more encouraging is that each customer is increasing the number of assets monitored by our technology.
Speaker 4: In closing, the strong first quarter results were an important step forward in our progress to delivering the type of performance that we expect in 2023 and beyond.
Speaker 4: Going forward, we plan to convert on our healthy backlog and drive sustainable returns in value for our shareholders. Our end markets remain supportive and we fully expect that our 3D strategy will provide opportunities to continue to grow the business for years to come.
Speaker 4: Our internal efforts are paying off and I believe that this team will deliver strong performance in 2023 and beyond. We are excited about the pending VLON acquisition and look forward to completing the transaction and recognizing its benefits.
Speaker 4: In summary, I believe Flowster is rapidly heading in the right direction to drive enhanced shareholder value.
Speaker 2: Operator, this concludes our prepared remarks. We would now like to open the call to questions. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker 5: Again, that is the star key followed by the digit one. We'll pause for just a moment.
Speaker 5: We'll take your first question from Josh Porzwinski from Morgan Stanley . Please go ahead. You're welcome.
Speaker 6: Congrats to the great quarter. This is Toby on for Josh.
Speaker 6: How should we think about seasonality and throughput for the rest of the year given the strong 1Q? Like would there be any drag from past due backlog along the way?
Speaker 2: So, you know, as we look at our first quarter performance, we were pleased to be able to execute a little bit better on our backlog than we anticipated starting the year, which really resulted in revenue exceeding what our expectations initially were for the first quarter of the year.
Speaker 2: That being said, it doesn't create a drag on revenue for the rest of the year, just given the strength of our backlog where it's at today. So in fact, the goal is to continue to plan and convert and improve productivity as we make our way through the years. From an EPS expectation, however, we would anticipate the second and the third quarter...
Speaker 2: given where we landed in the first quarter of the year, to look more like how we started the year. But with our expectations that the fourth quarter of the year continues to be quite strong.
Speaker 4: and delivers EPS above what we've seen in the first three quarters of the year. Yeah, and just to add, the operating environment is improving, so supply chain is more stable, the logistics environment is better. And so as those challenges subside, our operational performance and planning and productivity get better.
Speaker 4: it's allowing us to deliver more on the revenue side. So at Amy's point, what we expect is Q2 and Q3 to look a lot like Q1. We did a lot of great work in Q1 to unlock our capability and our capacity, and we expect to not go backwards as we progress through the year here.
Speaker 6: Thank you, that's really helpful. And then from a margin perspective, with some of the headwinds and friction subsiding, are we closer to thinking about margin targets for the cycle? Could it be in the prior mid-teens range on the table?
Speaker 4: Sure, yeah we had that out, we put that out several years ago and we definitely owe the investment community new targets. So I would just say let us get through Q2 and we'll talk about what we want to do for long term targets but we definitely know that we need to do that and we anticipate putting out new targets sometime this year.
Speaker 7: Thank you for that.
Speaker 7: Thank you for that.
Speaker 5: We'll hear next from Andy Kapowitz from Citi. Good morning, everyone. Hey, Andy. Good morning, Andy.
Speaker 8: Scott, bookings, as you said, were over a billion dollars again. You suggested you weren't seeing any signs of economic weakness impacting bookings. But last quarter, I think you had mentioned that you could still see growth in bookings off the $4.4 billion you posted in 22. And I know today you said bookings, you know, maybe more flattish versus last year. Is there anything in terms of incremental conversations you're having with customers Now that I start reading this, a similave reality about bookings is much more interestinghad Blessed I was akilling someone who came into the business of meeting and
Speaker 4: And I would say, you know, right now our plans are to be at the same kind of rate that we were at last year, if not higher. And so if we kind of break that down, you know, we're seeing record MRO and aftermarket bookings. And so that's a really good sign. We're at $550 million in the quarter.
Speaker 4: and we expect that to continue as we go forward. And so that provides the basis for what we need. And then it just really is about projects. And so on the project side, we've got great visibility to our project funnel. In fact, it's at a record level in terms of, you know, looking out 12 months into the future. There are a handful of larger projects there.
Speaker 4: But what I would say is we are now incredibly selective about what we're going to take, right? And so with the $2.8 billion backlog, it allows us to be more selective in providing the right work into the right facility and getting the margins that we believe we deserve as we're executing these complex jobs.
Speaker 4: And so I feel pretty good about our outlook and whether we'll be right at the number of last year or above will just depend on the project activity and what we determine to go forward. And so I think there's a real good chance to exceed it. I think we're really positioned well. And so I think we're going to come back to the drivers, the energy security side and the decarbonization are the two lanes that we see the most growth this year.
Speaker 8: Scott, I want to follow up in terms of last quarter, I think you said that recession could impact general industries and chemicals. I think even you said European chemicals are down 5% in January , but you just told us that general industrials and chemicals were up, I think, 11% year over year in bookings in Q1. So what do you think specifically in those end markets, particularly chemicals as you probably are aware? Let me know in the comments below.
Speaker 4: Now, gosh, I think it's been almost six quarters where we've seen chemical book and growth. And so that's the area that we're watching out for. I would say Europe chemicals would be the biggest concern from a GDP kind of driven recession perspective. General industries would be second.
Speaker 4: But today, in our Q1 numbers, we haven't seen any slowdown yet. And so, we're cautious about it, we're preparing and planning for a potential slowdown there, but net-net, we think the decarbonization and energy security bookings will offset any slowdown that we could potentially see. But again, we haven't seen that slowdown at this point. Very helpful, Scott. Thank you. And again, that is Sister Keith, followed by the...
Speaker 9: you know, the strategy behind.
Speaker 9: the transition that's going on in the energy space. But would like to also hear some perspective on the ability for that to decouple in your mind in the more traditional side of the energy space.
Speaker 4: Sure, I'd just start by saying we've seen this decoupling in prior cycles. You know, sometimes it's aligned and other times it is decoupled. And so I think we're decoupled from what we'll call a general GDP slash industrial slowdown.
Speaker 4: And again, the two biggest drivers are energy security and decarbonization. The third one would be just the lack of significant investment in 2020 and 2021. And so given the long cycle nature of our business, we're now just now seeing a lot of those big projects that were either on hold or delayed starting to move through the system.
Speaker 4: And when you look at the oil and gas side, you've got natural gas pricing in the US off a little bit, but we continue to see strong LNG and we see significant international activity on the oil and gas upstream side. And so I just I don't see you know, I think again, we might have some slowdown on our GDP type business. Again, it'll probably show up in chemicals in general industry.
Speaker 4: A lot of that's potentially oriented to Europe . We're not seeing that yet. But I believe that this energy cycle with the security aspect of it, the ESG and decarbonization component combined with the late cycle nature of our business, I believe that we're going to see continued growth, certainly 2023 and 2024.
Speaker 9: Thanks for that. That was helpful.
Speaker 9: the backlog margins, maybe...
Speaker 9: just are we at the point where the margin profile that you see in the backlog is being reflected in the margin profile that's being reported on a quarter-to-quarter basis? If not, when do you think that starts normalizing out and being more reflective?
Speaker 2: Sure, I'll take a stab at that one Mike. We are definitely seeing margins in backlog improve and that actually started at some point kind of midway through last year, but that profile is only getting better. So we've referenced these large projects.
Speaker 2: today is very helpful. And the other thing that I would comment on is the strength of our aftermarket and MRO business in the current year and actually going back into last year is very constructive in terms of improving those margins as well. And the last comment that I would make is just in general, our extended lead time.
Speaker 2: had resulted in some of the pricing actions that we've been pretty proactive about throughout 2022 and even early into 2023 finally starting to take hold.
Speaker 2: And so that is being, that's been really helpful in terms of bringing our margins through. We talked about this 30% as kind of a hurdle rate that we wanted to get to. We did get there a little bit quicker in 2023 than we'd anticipated, but we view this as a jumping off point and not necessarily the end goal.
Speaker 7: Great, very helpful. Thanks Amy.
Speaker 7: Great, very helpful. Thanks, Amy. We'll hear next from... Okay, we'll hear next from...
Speaker 5: Joe Giordano from Cowen.
Speaker 7: Hey guys. Good morning. Hi, Jim.
Speaker 10: Hey guys, morning.
Speaker 11: I was hoping, Scott, you mentioned that you expect orders this year, kind of flat with next year, which is a good number. If we were to just extrapolate that forward, let's just say in a scenario where…
Speaker 11: revenues next year are flat versus where you're guiding today just because orders are the same. Let's just assume that. Like what kind of margin uplift would you expect without any benefit of volume just given like where you plan on exiting your guidance this year into next year? I'm not ready to provide guidance for 2024. I know.
Speaker 4: I do appreciate the question though and I will say it will be up from where we are today. And I just say we've got two really good quarters in a row. We delivered a Q1 in a historically challenged environment and the teams are just laser focused now on Q2 and Q3 and building that. If we look from a higher level though and we will build on what Amy is saying.
Speaker 4: cost. We've done like five price increases now in 18 months. We've got the latest one effective January 1st. We're more selective on project bookings than ever before in terms of margin threshold. And so you get a lot of accretion with the new backlog every single quarter that works its way through. And that MRO price difference from our OE is pretty significant. So the higher that MRO is, the better it comes through.
Speaker 11: I appreciate all the commentary about the backlog, the margins, and being disciplined. I just think the industry has proven that discipline exists until conditions suggest that you need to be aggressive.
Speaker 11: controls are in place to ensure what you're saying happens in practice. Like how high up the chain are these decisions going, so that if things do get kind of tight and project activity wanes, that means we're not like chasing things that we shouldn't be chasing.
Speaker 4: Sure. We've always had good discipline on pricing approvals. So we've got, like most companies, we've got a nice kind of grants of authority on who can approve what. We've got some margin thresholds on the low side that say we can't do that. But there's also work strategically that we want to take, whether it's the right application or amazingly strong aftermarket that we're focused on.
Speaker 4: great visibility and are the approval process there. And so, I don't see us getting undisciplined in this area. And then again, our discussions with our senior management team, we have the backlog, we're at a really good place in terms of absorption and capacity. And so we're now at a place that we can be far more selective than ever before. And so, we're at a really good place.
Speaker 4: Those are the types of discussions that we're having with our sales force and our VPGMs about what do we want to take, how does it fit within the facility, and making sure that we can commit to the right slot in the manufacturing profile, and then really making sure that we can get the value out of those orders that we deserve, especially in the complex engineered products.
Speaker 4: that we're having with our Salesforce and our VPGMs about what do we want to take, how does it fit within the facility, and making sure that we can commit to the right slot in the manufacturing profile, and then really making sure that we can get the value out of those orders that we deserve, especially in the complex engineered products. Thanks, guys.
Speaker 12: Andrew, your line is open. You have Sabrina Abrams on for Andrew. I know you talked about reaching gross margins over 30% earlier than you were talking about and it sounds like you still have the incremental drag from more competitive projects that you booked in 2021. I think that headwind gets smaller as you move through the year, so how are you thinking about gross margins considering they were above 30% in 1Q?
Speaker 2: continue to get better sequentially as we made our way through. We've also talked about pricing, which is really starting to be a nice driver in that margin maintenance element of performance. I think where we want to continue to focus and ensure that we're really leveraging the top line, which has the ability to grow.
Speaker 2: outperformance from a margin perspective as we make our way through the year. However, if we can maintain margins at this level, we should start to see better operating margins drop through via SG&A leverage in our continued work with with respect to our tax rate.
Speaker 12: Great. Thank you. And can you talk a little bit about 1Q coming in ahead of expectations and what specifically in March drove better operations in the quarter? Is it just supply chain sort of getting better?
Speaker 4: Sure, the general environment was definitely better. So we've got the supply chain issues are now subsiding, the logistics issues are gone, we've got the labor in our facilities where we need it, and so that general environment allowed us to execute at a higher level. The other thing I would say is just...
Speaker 4: general planning. And so we started talking about Q1 back at the end of the third quarter and really focused on finishing 22 strong, but also starting the year off in the right direction and doing the things necessary to make sure that we had a good Q1. And so I just say the combination of a much better environment, enhanced and improved planning, and just a general commitment to say we're going to have a good Q1.
Speaker 2: Sabrina, let me just add onto that a bit. In the fourth quarter, we talked about really wanting to minimize that drop off between the fourth quarter and the first quarter in terms of margin performance and really minimize that impact. That's what we did. Actually, then what I think we saw in terms of the overdrive in margins in the quarter with the ability to minimize that drop off between the fourth quarter and the fourth quarter. That's what we saw in terms of the overdrive in margins in the quarter.
Speaker 2: to convert our backlog and to bring revenue in the quarter, but frankly, to do it in a way where we still have a strong backlog in place to work through that same planning and productivity cycle as we make our way through 2023 and into 2024.
Speaker 5: Thank you. I will pass it on. Again, that is the star key followed by the digit. Juan, if you have a question or comment, we will move next to Dean Dre from RBC Capital Markets. Thank you. Good morning, everyone.
Hey, good morning, Dean. How does deal size impact this quarter on the implied margins going into backlogs? When you start seeing, I think you had some outsized deals before it looked like the mix, you had more like mid-sized. So I think it's gotten to a good level, midsized is one moniker people that we keep asking for.
Do these tend to be better margin projects? Give us a call around deal size.
Sure I'll talk generally and then I can go into a little bit of the specifics but generally speaking the larger the award the more...
the more attraction to the competitive landscape there is. And so typically the largest awards have lower margins. And then as we kind of move down into that $5 to $10 million range, we get some really good margins on that. And then obviously, and Dean, you know this, right, but the MRO and the aftermarket have the highest margins in our mix of equipment. And certainly the market will.
work, which quite frankly we really like. Those come at higher margins. They're also a little bit easier on the execution side and a lot less time within our facilities and we're able to turn them quicker on the lead time. And so the Q1 bookings were really good from a margin mix perspective for us. Again, high aftermarket and MRO projects that we like. So some of the exceptions on the margin side, there are bigger projects that...
the cost inflation aspect of it and preserving what we call high, high, you know, higher margins relative to what we've traditionally taken. And then just the other aspect of some of these projects is we always look at the aftermarket entitlement. And if we believe that we are locked in for the long term aftermarket support, providing the seals into that application, pull through about products and other stuff.
That's exactly what I was looking for. I appreciate all that additional color. And just a follow-up question for Amy. Evan knows we haven't had normal markets in quite a while, but for working capital to sales target, you talked about getting below 30%. What's the...
What's the stretch target where if you really were able to optimize and assuming
continued supply chain, healing, and so forth. But where does that number go?
Yeah, if we could get this business to the mid-20s, Dean, it would be an incredible unlock for us from a cash perspective. And we think it's doable. We do need conditions to normalize a bit. As we talked about mix, the one comment that I would make is the mix that Scott talked about being accretive to margins.
with more complex projects. So there's a lot to like about the mix that we're seeing right now for a couple different reasons. Yes, and that was also great to see positive free cash flow this quarter as well.
So there's a lot to like about the mix that we're seeing right now for a couple different reasons. Yes, and that was also great to see positive free cash flow this quarter as well. Yes, absolutely.
Thank you. As a final reminder, it is the star key followed by the digit 1. We will move to Saree Boroditsky from Jeffries. Please go ahead. Thank you,
Thanks for fitting me in. So there's a lot of great commentary on the end market and bookings. I believe the current guidance implies book to ship work is roughly flat. So just given all this positive commentary, can you talk about what is driving that assumption?
Sure, so as you know, we've obviously guided to kind of a 10 to 12 percent increase in sales and with respect to our sales guidance and really our full suite of guidance for the year, we're not counting on everything going perfectly as we make our way through the rest of 2023.
So you could consider it a hedge on book to ship. You could consider it a hedge on project execution. But clearly, that book to ship business that is implied in the forecast is not quite as strong as what our booking guidance is. But I think that allows us to have a number of ways to deliver on our guidance range for the full year.
which we want to be both achievable from a credibility standpoint, but also create significant improvement over what we have seen in prior years from both an earnings per share and a margin perspective. That is the way we have gone about it with the sales guidance.
I understood. And then just some modeling questions. Obviously, margins came in stronger in the quarter, despite corporate being elevated. So what was the driver of the higher corporate spending? And is that the right run rate for the remainder of the year? Thank you. Sure. So I think our run rate for corporate spending, I would put it closer to where we were at in the year.
and that was around $5 million.
Thanks for taking the questions. We'll hear next from Nathan Jones from SPIFIL. Good morning, everyone. Hey, Nathan. I'd like to follow up on some of the commentary around your ability to be...
still at the prior peak, it's been a lot of restructuring and stuff so maybe capacity utilization comes into that. Just any any further commentary you can give us on where we are with unabsorbed overhead and your abilities to really be selective on projects here. Sure, just the first comment before I jump into you know capacity around the world would just be we got to remember when we compared our prior years just the FX on the revenue side.
And so, overall, I would say we're in a reasonably good position on absorption. It continues to improve. And then I'd say what we're seeing in the margins is just a much more stable environment of things getting through the shop. And so we're now, our cycle times and our ability to, the velocity of equipment going through the manufacturing side is substantially better, which improves.
you know, everything on the variances and the absorption side. But, you know, like always, you know, we've got a pretty large footprint and there's always a handful of facilities that aren't where we want. And so when I talk about being selective, you know, those are the things that we're looking at. We've improved our sales and operational planning process dramatically in the last...
two to three years. And what we're seeing, the results from that are being selective on manufacturing sites that need work are getting their work directed to them, but then it's also allowing us to be more selective on the margin side. And so I'd say, overall, we're in a reasonably good position in terms of capacity globally. However, there's one or two sites that still need some work and we're directing the new orders to that. And then the other thing I'd just say is, if you look across the competitive landscape, we're seeing a lot of our
Certainly on the pump side and that well even on the valve side as well We're seeing a lot of the peers now starting to fill up and becoming more disciplined collectively and so I just I feel like we're in a far healthier position than a year ago and certainly than two years ago and You know I would say we've got a Really good run here for the next couple quarters in terms of being able To be selective on bookings getting them into the right locations and getting the margins we deserve
Historically the competitors and yourself starting to fill up capacity has coincided with improved pricing. Do you expect to see continued improved pricing I guess on big margins in projects continue to improve for the industry as well as for FlowServe over the next year or so?
Yeah, I think it has to happen, Nathan. What we've seen, even this quarter we had some of our peers book some really big projects, and they are doing the same thing we are. So I fully expect pricing certainly on these larger projects to move up substantially from where we were two years ago.
But even if we compare to last year, I think these projects get priced to the higher level. You know, again, with our backlog and our capacity situation, we're not going to take work that we did at the margins we did two years ago. No way.
Thanks for taking my questions. Thank you, David. With no additional callers in the queue, that will conclude today's teleconference. We thank you all for your participation. You may now disconnect.
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